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How would Congress’ new tax bill affect me?

Written by Kristen Grau on Sep 20, 2021 | Last updated on Oct 6, 2021
Reviewed by Sean DiMercurio CPA CGMA

A proposed bill in Congress would affect tax rates, capital gains, retirement accounts and more. People who make more than $400,000 would likely see their tax bills go up.

If you make more than $400,000 a year, higher income and capital gains tax rates might be on the way. A recent tax bill summary revealed those potential increases, along with an increased corporate tax rate that hasn't been voted on yet.

Why now? House Democrats want to use the tax hikes to pay for Biden’s $3.5 trillion spending plan for infrastructure and social programs, according to Axios.

The exact language for these was released in two parts — but nothing has been voted on yet. While these are subject to change, the bill can go through even without Republican support, CNBC reported. That’s why you should start preparing and talking to your tax advisor to see if you might be affected.

These are the biggest changes to expect.

Increased top marginal tax rates

If passed, the new top marginal tax rate for individuals would be 39.6 percent. It’s currently 37 percent.

The new 39.6 percent rate would apply to you if you meet these income thresholds:

Filing status Threshold
Single filers Over $400,000
Heads of household Over $425,000
Married joint filers Over $450,000
Married separate filers Over $225,000

The bill simply accelerates the timeline for a higher tax rate. Under the Tax Cuts and Jobs Act from 2017, the increase would have come in 2026.

If you make below those incomes, your tax rate wouldn’t change. These rules would take effect in 2022.

Increased top long-term capital gains tax rate

Long-term capital gains taxes are taxes on assets you sell after holding them for more than a year. Short-term capital gains are taxed at normal individual rates.

Under the new law, the new top tax rate for long-term capital gains and qualified dividends would be 28.8 percent.

The current rate on long-term capital gains is 20 percent with an additional 3.8 percent surtax on net investment income. This bill would increase the base rate to 25 percent and wouldn’t affect the surtax.

Only the top long-term capital gains tax rate would change. There are three in total; the 0 percent and 15 percent rates would stay the same. If you meet these income thresholds, the new 25 percent capital gains tax applies to you:

Filing status Threshold
Single filers Over $445,851
Heads of household Over $473,751
Married joint filers Over $501,601
Married separate filers Over $250,801

The top rate change would apply to assets realized, or sold, after Sept. 13, 2021.

Capped retirement contributions for high-income earners

The bill would introduce contribution limits and distribution minimums on Individual Retirement Accounts (IRAs) for the high-income earners.

If you meet one of these thresholds, the most you can have in your Roth or traditional IRA is $10 million:

Filing status Threshold
Single filers Over $400,000
Heads of household Over $425,000
Married joint filers Over $450,000
Married separate filers Over $400,000

If your accounts exceed $10 million and you meet one of those thresholds, there would be a new minimum withdrawal amount. You’ll have to take out 50 percent of the amount that exceeds the $10 million limit the next year.

So if your account overflows to $12 million at the end of 2021, You’ll have to withdraw at least $1 million in 2022, since that’s 50 percent of the excess $2 million.

If you’re not at retirement age yet, it’s not clear how or if the 10 percent early withdrawal penalty would apply.

These rules would take effect in 2022.

Repealed Roth conversions

Roth conversions, often called backdoor IRAs, would also be banned for high-income earners. A Roth conversion involves transferring money from a traditional IRA or 401(k) into a Roth IRA. The benefit of that is the money in a Roth IRA grows tax-free, and you don’t have to take minimum withdrawals.

That would be repealed for those who meet the following income thresholds:

Filing status Threshold
Single filers Over $400,000
Heads of household Over $425,000
Married joint filers Over $450,000
Married separate filers Over $400,000

This rule would take effect in 2032.

Regardless of your income, mega-backdoor Roths will also be banned. Mega-backdoor Roth IRAs are similar to Roth conversions, but with larger amounts of money and different qualifications. (This is how PayPal founder Peter Thiel was able to grow his retirement account from $2,000 to $5 billion within 20 years.) This rule would take effect in 2022.

Increased corporate income tax rate

One of the biggest aims of the bill is to raise the top corporate tax rate to 26.5 percent from the current 21 percent.

Instead of the flat corporate tax rate, a new graduated rate system would come into place, which is similar to the system prior to the Tax Cuts and Jobs Act. The new rates would look like this:

Income Tax rate
First $400,000 18%
Income up to $5 million 21%
Income after $5 million 26.6%

President Biden’s original plan was to raise the rate to 28 percent, but the bill doesn’t indicate if that would happen in the future.

These rules would take effect in 2022.

Lower tax bills for people making less than $200,000

If you make less than $400,000, estimates show that your taxes will decrease over the next 10 years.

Different income brackets show different decreases. For example, people who make $50,000 to $70,000 are expected to collectively save around $15 billion in taxes by 2023.

By the same year, people who make more than $1 million will collectively see an increase of around $96 billion in taxes. By 2031, that number jumps to $97.5 billion.

You can view the full breakdown by downloading the report from Congress’ tax committee.

The bottom line

With a flurry of new tax changes likely on their way, it’s important to start preparing now and talking to your tax advisor.

If passed, Congress’ new tax bill would increase the top marginal tax rate, increase the corporate tax rate, place new restrictions on retirement accounts and more. In total, the hikes are expected to raise around $2.9 trillion.

House Democrats’ goal was to pass the bill by the end of September — but now it stands in limbo.

Sean DiMercurio CPA CGMA

Sean DiMercurio CPA CGMA

Sean is Orlando’s most entertaining Certified Public Accountant and firmly believes ice cream can solve any problem.